Update of OECD Project on Financial Education

International policy issues and
initiatives on Financial education: the
OECD project on Financial Education and the
International Network for Financial education
OECD-IOPS 2nd MENA workshop
on private pension regulation and
supervision
Amman, 1-2 March 2011
André Laboul
1
Outline
• I. International financial education issues
• The framework
• Calling for financial education
• International responses: The OECD and INFE
programme
• Need for an integrated approach
• II. Selected pension issues
2
Selected International Trends
• Increasing financial risks ( financial crisis)
• Access and inclusion issues (vulnerable
groups)
• Increased sophistication
• Increased transfer of risk to households who
are taking on more financial risk and
responsibility. This is true for instance for
both credit decisions (mortgage ), and
retirement savings (DC schemes).
3
Increasing financial risks
and transfer of risks to households
• This calls for a new regulatory approach
• New focus on market conduct and not only
on prudential regulation
• Focus on financial education but also access
and consumer protection
• Awareness is key
4
Lack of awareness
• The problem is indeed that households may not
be aware of the risk they face
• Households may not understand the need to be
protected or overestimate their protection and
their understanding
• Thus, they do not seek protection
• and may…just not care
Call for further
information and awareness
• Transparent information and disclosure is
key. This is the minimum
• Information should be understandable;
plain language should be used
• “Less is more”: danger of overinformation
• Information is necessary but not
sufficient: individuals need to understand
the information
6
Call for financial education
– Many individuals are ill-equipped to face risks
and make proper financial decisions
– This calls for improved financial education
and awareness on
• Risks
• Financial ,pensions , insurance products
• Their rights and responsibilities
– The goal of financial education (a process) is
to improve financial literacy (the result)
Broader impact of
financial education
• Financial education will help build more
efficient financial markets by:
—improving confidence
—encouraging the development of new products and
services
—and thus increase competition, innovation and
product quality
• Financial education can also help to reduce
poverty and improve social cohesion
The situation is serious
• Recent surveys show that the level of financial education
is low in most countries, including in developed
countries.
• Worse: consumers often overestimate their financial
understanding and thus do not seek to improve it
• This is all the more important as the process of financial
education takes time
• Financial education is not just for investors. It is
essential for the average family trying to balance its
budget, save for children’s education and save for
retirement
Solutions are encouraging
• We have found that good financial education
programmes are effective: they can increase
workers participation in pension plans,
reduce mortgage and credit delinquency, and
more generally, increase consumers
confidence in themselves and in financial
institutions.
A role for all stakeholders
• Governments and financial authorities (key role of
central banks in several countries) working hand in
hand with parliament (including national campaigns,
coordination)
• Schools
• Financial institutions
• Employers
• Trade unions
• NGO’s, etc.
There is a strong call for national strategy
and public-private partnership
11
Win-win strategy for financial
industry
• When objectively promoting financial
education and awareness, financial
institutions help:
• Improve confidence and trust in financial markets,
products and institutions
• Improve risk awareness and thus increase demand
for protection
• Improve understanding of products and their
advantages and thus increase demand
• Reduce losses through better prevention and
mitigation
12
Momentum due to financial crisis
• Findings from a survey conducted through the
International Network for financial Education
– Lack of financial literacy is one of the contributors to the crisis
and in particular of its aggravation
– The crisis and its consequences have highlighted the need for
enhanced level of accountability of financial institutions vis-à-vis
their clients and consumers
– They have also raised awareness on the need for increased
financial literacy and capability of households and policymakers
– The crisis is a « teachable moment »
– The crisis is a trigger for policy actions in the financial education
area
OECD and INFE programme
on financial education
• Recognising the need for policymakers and other
relevant stakeholders to meet the objective of
improving financial education, the OECD
launched in 2oo3 its “international programme
on financial education”
• Under the aegis of the OECD Committee on
Financial Markets and the OECD Insurance and
Private Pensions Committee
14
OECD and INFE programme
on financial education
• OECD and the network have become the
international leader on the development of
guidelines and standards in financial education
•
•
•
G8 Financial Ministers recognised, in June 2006, OECD work on
financial education and requested the Organisation to further develop
financial literacy guidelines based on best practices
recently supported by policymakers like Secretary of US Treasury, the
Council of the European Parliament , the governor of Reserve bank of
India or the Mexican Minister of Finance
new G20 mandate (in Seoul and Paris) for FSB, with OECD and others
to report to G20 2011 summit on policy options to enhance financial
consumer protection and education and for OECD, FSB and others to
develop principles for the G20 FM and CBG meeting
15
Outputs
• Several publications
– the first international survey on financial
literacy
– Report on financial literacy in insurance
– Report on financial literacy in pensions
– Research on behavioral issues in
financial education, on annuities,
communication
– Stocktake on methodology, financial
education at school
– etc
• An international definition
focusing on a capacity building process
OECD Principles
on financial education: a selection
• Financial education programmes should focus on high priority
issues (credit, debt, pensions, etc)
• Financial education should be taken into account in the regulatory
and administrative framework and considered as a tool to
promote economic growth, confidence and stability, together with
regulation of financial institutions and consumer protection .
• National campaigns should be encouraged to raise awareness of
the population
• Financial education should start at school. People should be
educated about financial matters as early as possible in their lives
(see session VI on financial literacy as a life skill to be integrated in
schools)
OECD Principles
on financial education
•
The role of financial institutions in financial education should
be promoted and become part of their good governance with
respect to their financial clients. Financial institutions’
accountability and responsibility should be encouraged not only in
providing information and advice on financial issues, but also in
promoting financial awareness of their clients, especially for longterm commitments and commitments which represent a
substantial proportion of current and future income. (see session V
on social responsibility of the financial sector)
• The development of methodologies to assess existing financial
education programmes should be promoted. Official recognition of
financial education programmes which fulfil relevant criteria
should be considered.
• .
18
OECD Principles
on financial education
• In order to take into account the diverse backgrounds of
investors/consumers, financial education that creates different
programmes for specific sub-groups of investors/consumers (i.e.
young people, the less educated, disadvantaged groups) should be
promoted..
• According to the needs of the jurisdiction, evaluation processes
should inter alia involve: Evaluation on a more systematic basis of
the risks, of the population’s degree of literacy, of the education
needs
19
OECD good practices (building on
comparative analysis)
• Good practices for financial education
on pensions ( 2008)
• Good practices for risk awareness on
insurance (2008)
• Good practices for Financial
education on credit (2009)
• More to come (e.g on financial
education at school 2011)
Worldwide reach
• Setting up of the International governmental network for
financial education:
• members from more than 150 institutions representing
75 countries and international bodies
• International Meetings in Washington, Bali, Paris, Rio
de Janeiro, Rome, Beirut ; next will include, Canada,
South Africa, United Kingdom
• Regional programmes currently under development in
South East Asia, central Europe, MENA and Latin
America
• MoU with countries (for instance Indonesia)
INFE Subgroups
• The measurement of financial literacy and inclusion
• The evaluation of financial education programmes
– It is important to provide financial education, however it is
essential to provide efficient and effective financial education
programmes.
• Financial education at school
• The development of national strategies and related issues
• Future sub group on financial inclusion/access (but avoiding
duplication)
• Future sub group on financial education and women
22
OECD/INFE work
• work on pensions issues, which will be undertaken by the OECD in
co-operation with the IOPS
• work on credit, savings, investment with the objectives to develop
guidelines ; work on the role of financial intermediation in the
financial education process
• work on behaviour economics (essential to develop adequate
financial education strategies)
• Work on communication/awareness campaigns, social marketing
and development of appropriate related tools
• Work on vulnerable groups
• the development of the financial literacy option in PISA 2012
(support through the subgroup on financial education programmes
in schools);
• Review and adaptation of current guidelines
23
International dissemination
• Conferences/presentations all over the world: Brazil,
Columbia, Egypt, France, Hong Kong, Hungary, India,
Indonesia, Malaysia, Mexico, Russia, Singapore, Turkey,
UK, USA
• Issue a newsletter, several publications
• Co-operation with other international organisations
(IMF, EU, IOPS, FinCoNet etc.), including a close cooperation with the WB
• Setting up of an international Gateway at
www.financial-education.org, (currently in
upgrading phase)
International Gateway on financial education
www. Financial-education.org
Financial education is not enough:
necessary…but not sufficient
– Other measures are needed to overcome
consumers myopia and passive behaviour
– To deal with fraud, miss-selling
– To protect consumers against bankruptcies
– And more generally to protect consumers’
rights
Financial education: part of a system
(pension example)
Ensuring Adequate Retirement Income
Regulation
Financial
Education
Other
Approaches
Consumer
protection
Provision
Of
Information
Management
of
Investment
Funds
Awareness
Information
Content and Delivery
Behavioural
Characteristics
Of
Consumers
Instruction
Advice
Automatic
Enrolment
Financial consumer protection
• Financial education and financial
consumer protection are closely linked
• OECD 2009 survey on financial
consumer protection
• Policies focus mainly on disclosure (which thus call
for education)
• Need to test relevance of existing disclosure
• Less is more
• Other tools explored in some countries
• Importance of adequate redress mechanisms
28
Integrated pillars
• Access and inclusion
• Prudential regulation and enhanced
governance
• Consumer information and protection
• Competition
• Financial education and awareness
They are interconnected and interactive
29
Conclusion of the first part
• In the framework of increasing risks and increasing transfer of risks, of
gaps in coverage and lack of education and awareness; there is a strong
need for improving financial education and awareness
– This process calls for national strategies, public-private partnership and
important role of NGO
– It should start at school
– Is should deal with priority areas such as pensions, credit, savings and risk
awareness
– It should allow for special role by financial institutions whose responsibility
should be encouraged
– it should address vulnerable groups
– It calls for efficient education and methodology to measure both literacy and
efficiency of the programmes
– Financial education is indispensable but financial education alone is not the
panacea; it is part of a wider policy approach, complementing prudential
regulation and calling for consumer protection
– It calls for a worldwide approach
30
Pensions
• Awareness: national campaigns
• DC schemes
– Communication
– Financial education
• Financial consumer protection
31
Dedicated work on financial education and
awareness for pensions and insurance
• Started in 2006 on the recommendation of the OECD Council
• Complement the OECD general work and recommendation
on principles and good practices for financial education and
awareness
• Developed by the OECD Insurance and Private Pensions Committee
and Working Party on Private Pensions
• Involved broad consultation of a wide variety of stakeholders
 Adoption by the OECD Council in April 2008 of
2 Recommendations on Good Practices for :
• Financial Education relating to Private Pensions
• Enhanced Risk Awareness and Education on
Insurance Issues
 Publication of Improving Education and Awareness on
Insurance and Private Pensions, 2008
32
National campaigns
•
Most of the OECD countries are facing the challenge of how to maintain sustainable
pension systems in the face of aging populations. Many have undertaken pension
reforms – which frequently involve the introduction of policies which may be seen as
unpalatable to parts of the population. These reforms also often involve individuals
having to take more responsibility for saving for and funding their retirement
income.
•
Several OECD governments have therefore launched public awareness campaigns to
help explain to their populations the need for reforms, the policy undertaken and the
increased responsibilities which individuals have for funding their own retirement.
•
This report contains a review of some of the main campaigns that have been launched
in OECD and selected non-OECD countries and provides a preliminary assessment of
their effectiveness in terms of extent to which original goals were achieved. Case
studies include a comparison between CEE countries, as well as Ireland, Sweden,
Singapore and others
33
34
35
36
Initial conclusions / good practices
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Governments first need to define their role in the campaign (which should focus on explaining systematic
change and building confidence)
When explaining reforms of a pension system objective information is essential
Government campaigns work when they clearly distinguish between information and advice
To be successful governments need work with many partners and to use varied channels
Building on existing financial education work and campaigns can boost effectiveness
Governments need to coordinate their campaigns carefully with these other stakeholders – particularly
private sector advertising
Campaigns may be divided into different stages – e.g. an initial stage may choose to focus on opinion
leaders, who can subsequently provide independent information /advice to others
Governments may include an element of targeting journalists in the media in their campaigns – with these
groups then able to explain reforms to the broader population.
For campaigns to work they should not only target older people – information needs to be delivered to those
still working and the young.
People need a unified picture of their pension options – hence projections are important
Governments should not shy away from linking pension reform to other topics – such as labour market
issues (e.g. need to work longer)
To have the long lasting impact aimed at, campaigns need to be on-going
The impact of campaigns needs to be regularly evaluated
Behavioural economics shows that some groups will not or cannot save and governments should therefore
consider linking their campaigns with other mechanisms (e.g. automatic enrolment and well designed
default options)
37
Defined contribution schemes
• DC schemes transfer longevity and
investment risks on individuals
• This affects investment choice but also
level of contribution
• Call for proper communication
• Call for financial education
38
Communication
•
•
•
•
•
The importance of DC pensions is growing rapidly
DC plans require individual members to bear significant risks to take a much more
active role in managing their pension savings than would be the case in a traditional
DB pension
To successfully manage risks, individuals need to understand both the nature of their
pension plans and their responsibilities and to receive periodic and recurring updates
on the status of their pension savings. Such updates are typically provided by the
pension statement.
Policymakers, plan sponsors and plan members generally agree that communicating
pension benefits in a clear, understandable and timely manner benefits all
stakeholders, yet there is little consensus as to what information should be included
or excluded from the pension statement or how that information should be
presented.
The main purpose of this project is to assess what countries include in their pension
statements, discuss its design, what information it should include in order to most
effectively communicate information about members’ pension benefits and how the
statement can help the encourage greater savings
39
40
41
Good Practices on Financial Education
relating to Private Pensions
Rationale:
1.
Unique nature of the pensions product makes financial education
particularly important…

Long-term nature of contract, complex products, wide social coverage, low risk
tolerance, large number of pension schemes, potential impact on financial markets
and economy
2.
….Combined with demographic and systematic trends:

Increased longevity , shorter working lives, lower birth rate, Decline in public
pensions, shift from DB to DC schemes
3.
Lack of financial knowledge relating to pension:

Lack understanding of the changing retirement environment, of the need to save,
of investments, lack of trustee and fiduciary capability, passive behaviours and
individual choice
42
Good Practices on Financial Education
relating to Private Pensions
Key messages :
 Role of governments :
 Explaining the interaction between public and private sources of
etirement income
 Informing on pension reform and other relevant evolutions
 Ensuring the provision of sufficient, practical and simple
information on pension issues and pensions projection in particular
 Importance of national campaigns and school programmes,
evaluation process
 Specific needs of members of DC schemes
 Role of key stakeholders : plan sponsors, pension funds,
fiduciaries, intermediaries, social partners
 Financial education limits: importance of disclosure, limited
choice, automatic enrolments, default options
43
Integrated approach
• Information, communication, financial
education: necessary but not sufficient
• Behavioral factors
• Default mechanisms
• Move option from opt in to opt out
• Need also for consumer protection
44
OECD Core Principle 5: Rights of members and
beneficiaries and adequacy of benefits
• Non-discriminatory access should be granted to private pensions
schemes. Regulation should aim at avoiding exclusions based on
age, salary, gender, period of service, terms of employment, parttime employment, and civil status. It should also promote the
protection of vested rights and proper entitlement process, as
regard to contributions from both employees and employers.
Policies for indexation should be encouraged. Portability of
pensions rights is essential when professional mobility is
promoted. Mechanisms for the protection of beneficiaries in case of
early departure, especially when membership is not voluntary,
should be encouraged.
45
OECD Core Principle 5: Rights of members and
beneficiaries and adequacy of benefits
•
Proper assessment of adequacy of private schemes (risks, benefits, coverage) should
be promoted, especially when these schemes play a public role, through substitution
or substantial complementary function to public schemes and when they are
mandatory. Adequacy should be evaluated taking into account the various sources
of retirement income (tax-and-transfer systems, advance-funded systems, private
savings and earnings).
•
Appropriate disclosure and education should be promoted as regards respective
costs and benefits characteristics of pension plans, especially where individual
choice is offered. Beneficiaries should be educated on misuse of retirement benefits
(in particular in case of lump sum) and adequate preservation of their rights.
Disclosure of fees structure, plans performance and benefits modalities should be
especially promoted in the case of individual pension plans.
46
implementation
– Access to plan participation, equal treatment
and entitlements under the pension plan
•
Employees should have non-discriminatory access to the private pension plan established by
their employer. Specifically, regulation should aim at avoiding exclusions from plan
participation that are based on non-economic criteria, such as age, gender, marital status or
nationality. In the case of mandatory pension plans, those plans that serve as the primary
means of providing retirement income, and those that are significantly subsidised by the
state, regulation should also aim at avoiding other unreasonable exclusions from plan
participation, including exclusions based on salary, periods of service and terms of
employment, (e.g., by distinguishing between part-time and full-time employees or those
employed on an at-will and fixed-term basis). Regulation of voluntary and supplementary
pension plans also should aim towards similarly broad access, although the extent of such
access may take into account factors including the voluntary nature of the arrangement, the
unique needs of the employer establishing the pension plan, and the adequacy of other
pension benefits
47
implementation
• Benefit Accrual and Vesting Rights
Accrued benefits should vest immediately or after a period of employment with
the employer sponsoring the plan that is reasonable in light of average employee
tenure. Benefits derived from member contributions to the pension plan should
be immediately vested.
• Pension portability and rights of early leavers
• Disclosure and availability of information
• Additional rights in the case of member-directed,
occupational plans
• Entitlement process and rights of redress
48
IOPS Financial Education
Project
•
IOPS project will focus on the role of pension supervisory authorities in providing
information and education to members of pension funds
– Part I will examine campaigns run by pension supervisory authorities in
response to the financial crisis stressing how pension savings are long-term and
attempting to preserve confidence in pension systems
– Part II looks at the types of comparative data on performance and costs which
are provided by pension supervisory authorities to help individuals choose
between providers
– Part III looks at some innovative financial education campaigns which are
being run by supervisory authorities in countries such as Chile, Kenya, Singapore
and Turkey
49
50
THANK YOU
more information at:
www.oecd.org/daf/financialeducation
and www.financial-education.org
51